Germany blames trade as economy cools

Government spending declined for first time in almost five years, with exports and imports also down

bloomberg

15.05.2018

A worker in a Mercedes-Benz plantPhoto: DPA

Germany's economy grew at the weakest pace in more than a year at the start of 2018, held back by trade, amplifying a slowdown that’s been seen across the euro area this year.

The 0.3% expansion was softer than economists had forecast and just half the pace recorded in the final three months of 2017.

The Dutch economy also cooled more than expected. With the 19-nation currency region seeing a broadly similar deceleration, the question for the European Central Bank is whether this is merely a soft patch or indicative of something more alarming.

So far, officials have largely dismissed the sluggish start to the year -- blaming factors such as colder weather -- and expressed confidence that weakness will dissipate in the course of the year.

Speaking on Monday, ECB Governing Council member Francois Villeroy de Galhau argued that growth remains solid and broad-based and that policy makers were still likely to halt asset purchases this year.

ECB Governing Council member Francois Villeroy de GalhauPhoto: AFP

The European Commission has also downplayed concerns and this month maintained its forecast that full-year growth will almost match the decade-high pace hit in 2017. Still, there are threats, including rising trade protectionism and a stronger euro that could act as dampers on the expansion in Germany and the euro zone.

"The German economy remains fundamentally strong despite the sudden loss of momentum," said Oliver Rakau, chief German economist at Oxford Economics. “However, it appears that with last year’s global trade surge fading and the spectre of protectionism hanging over firms, the German economy has passed its growth peak for now."

The euro was little changed on Tuesday and traded at $1.1928 as of 9:25am central European time. While it's declined in recent weeks, it's still up about 9% in the past year.

Germany's statistics office said first-quarter growth was bolstered by a pickup in equipment investment and construction and a slight increase in private consumption. Government spending declined for the first time in almost five years, with exports and imports also down.

"Whether this marks the end of a robust expansion or is just a bump in the road is crucial to understand as the ECB mulls the end of asset purchases. We think a modest amount of momentum has been lost, but that 2Q will see a rebound," stated Jamie Murray and David Powell from Bloomberg Economics.

The Bundesbank predicts record orders will boost German output in the coming months. Just last week, Siemens raised its outlook for full-year earnings, and HeidelbergCement said the economic upswing will boost construction activity in its major markets after a long winter held back first-quarter results.

While shrugging off the recent weakness, the ECB has acknowledged threats to growth, saying last month that global risks have become "more prominent."

In news that might please European central bankers in their long battle to revive inflation, French wage growth accelerated in the first quarter to 0.7%. While the quarter is often stronger than the rest of the year, that's still the biggest increase since 2013.

In China, data on Tuesday showed economic momentum broadly held up in April with industrial production exceeding forecasts, though slowing investment signalled a moderation in the coming months. Retail sales also rose less than expected.

Eurostat will publish a second estimate for euro zone GDP at 11am CET time. The ZEW institute will release its latest investor expectations index at the same time.